January 15, 2014

Conservatives used to say Obamacare is socialized medicine. Now they say it is a “government bailout” of insurers.

The new claim is just as misleading and cynical as the old one.

The latest conservative plaything is a pair of previously obscure Obamacare features: “reinsurance” and “risk corridors.” Their mechanisms are a bit complicated to explain. (Read here if you want the details.) What matters is their shared purpose, which is to reimburse insurance companies that end up taking heavy losses—say, because the new marketplaces don’t attract enough young, healthy subscribers. Remember, insurers depend on premiums from people in good health to subsidize the costs of the sick. Without the right mix, the premiums insurers collect won’t be sufficient to cover the cost of clams. They’ll lose money, raise premiums in the future, drop out of the market altogether, or some combination of the three. In short, bad stuff will happen.

To Obamacare supporters, reinsurance and risk corridors are tools for stabilizing the insurance market and easing the transition from the old system to the new. (That’s why I’ve been calling them “shock absorbers.”) But the provisions started attracting scrutiny from the right in the fall, when policy watchers like David Freddoso of Conservative Intelligence Briefing first wrote about it. Now reinsurance and risk corridors are getting more sustained attention from the Weekly Standard, Fox News, and the conservative movement writ large. Republican Senator Marco Rubio has sponsored a bill to repeal the risk corridors. “Why should taxpayers have to bail out health insurance companies in the increasingly likely event that ObamaCare leaves them with financial losses?” Rubio wrote this week, in an op-ed for the Fox website. “This is government favoritism and corporate cronyism at its worst, and it’s taxpayers that will pay the price unless we stop it.” Insurers are sufficiently spooked that, as Buzzfeed’s Kate Nocera has reported, they are undertaking a lobbying campaign to keep the provisions in place.

The bailout analogy is potent. And it’s certainly accurate to say that, under Obamacare, some insurers may collect payments from the government to help offset losses. But the analogy breaks down after that.

Bailouts typically start with companies taking egregiously irresponsible actions and end with the government forking over mind-boggling sums of money to save them. Think of the savings and loans institutions misleading the public about the state of their finances in the 1980s—or the financial industry making those bad home loans and risky investments a decade ago. Each of those involved grievous management errors, frequently skirting the limits of legality. The federal outlays to save those banks were in the hundreds of billions of dollars.

With Obamacare, the situation is different. Projecting future insurance costs inevitably involves a little guesswork. With a brand new program like Obamacare, it inevitably involves a lot of guesswork. Even the smartest, most responsible actuaries might not get the numbers right, for reasons Sy Mukherjee of ThinkProgress explains:

Insurance companies were sort of shooting in the dark when they set premiums for Obamacare’s first year. They had to approximate how many people would enroll, how old the customers would be, how sick they would be, how much insurers would have to pay out in claims — but the whole enterprise was, ultimately, a series of educated guesses.

Will the guesses prove wrong? Humana officials told investors last week that the risk pools look a little worse than they had anticipated. But, as Sarah Kliff of the Washington Post just reported, officials at Wellpoint say their risk pools seem ok while the CEO ofAetna described the demographics as "better than I thought they would have been."

Truth is, no insurer will be sure about its beneficiaries for many months, until the open enrollment period ends and the newly insured have a few months in which to file claims. That makes it impossible to know what kinds of losses, if any, insurers will take. But even if the losses are significant, the taxpayers won’t be in for another Wall Street-style bailout.

For one thing, the reinsurance money comes from the insurers themselves, who pay a tax on each beneficiary. It's basically a transfer of funds, from all carriers to those those companies inside the Obamacare marketplaces that end up with unusually unhealthy members. In this sense, it’s an insurance policy for the insurers—and one they more or less finance on their own.

The payouts from risk corridors are a little different, in the sense that those dollars come directly from government funds and have no actual limit. But the risk corridors also build up government funds—in effect, by claiming some of the profits from insurers who reap unexpected windfalls. The Congressional Budget Office, in its overall cost estimates for the Affordable Care Act, assumed that the inflow and outlfow would be roughly the same, so that the risk corridor program as a whole would be budget neutral. Even if CBO's prediction is wrong, and the government ends up spending more than it raises, the difference is likely to be modest. The formula for payouts calls merely for government to share in high losses or gains, not to take them on completely. It's enough to protect the insurers, the thinking goes, but not enough to cause a massive outlay. Meanwhile, lower-than-expected premiums are likely to save the government much more money than the risk corridors would ever pay out.

Conservatives might object to reinsurance and risk corridors on principle, regardless of amounts involved. That would be a perfectly legitimate argument, except for one thing: Reinsurance and risk corridors are already a feature of some government programs, most prominent among them Medicare Part D. The reinsurance and risk corridors in Obamacare and Medicare Part D are remarkably similar, except that Obamacare’s are temporary and Medicare Part D’s are permanent—which is to say, they are still part of the program.

What's that? You haven't heard Republicans attacking Medicare Part D an insurer bailout? Maybe that's because of one other, obvious difference between Part D and the Affordable Care Act. Only one of them was signed into law by a guy named Barack Obama.

Update: The Rubio bill would repeal only the risk corridors. Originally, I wrote that it would repeal both provisions. My apologies for the error.